April 20, 2024

Of late, education loans are becoming a headache for the public sector banks. Loans which remain overdue for 90 days or more are technically termed as non-performing asset (NPA). According to Prime Minister Narendra Modi’s ‘Skill India’ project, making higher education affordable is a key objective. However the growth in education loan has been steadily declining with the number of loan disbursements seeing a 60% fall since 2009. This is because more than 10% of such loans have been categorized as NPA’s. Also, in this domain, it has been observed that the private banks, which are actively involved in personal segment loans such as home loan, car loan, gold loans, are nowhere to be seen. The NPA level is on the higher side in case of education loan because the advances are collateral free up to a certain level.

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Another primary reason behind the poor repayment of educational loans is the poor scope of employment and increased scale of finance for the technical and professional courses. The repayment of education loan is supposed to come from the future income of the student once he gets a job. However, with rising cost of education there is a serious anomaly between the monthly income of the student and his/her commitment to repay.

Nevertheless, the popularity of education loan is growing by the day, the reason being increasing fee structure of several institutions. Parents are unable to finance the same and approach banks for loans. But as stated earlier, disbursements are going down. The concept of education loan first came into existence in 1995 when it was introduced by the SBI. Now, almost all PSU banks offer education loans. Due to increasing Non Performing Assets (NPA) on educational loans, the Indian Bankers Association (IBA) has revised the educational loan scheme, framed in 2001. The banks have been advised to be prudent and cautious while granting loans. Also, RBI governor Raghuram Rajan recently warned students and parents against taking huge education loans to study in institutions which offer ‘useless degrees’ with which they cannot get good jobs and hence find it difficult to repay the loan.

Banks and other institutions lending in this sector have developed a common strategy to reduce loan default by getting footprint of every student who takes loan created in the credit bureaus’ database. Hence, whenever an individual applies for a new loan, the credit score will reflect the history from the education loan. With time, this will help to reduce NPA’s. But banks should ensure that genuine students who get admission in good institutions are not deprived of higher education for want of finance.

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